When is a natural monopoly likely to arise?
A) when a firm controls a crucial input to production
B) when economies of scale exist over the relevant range of demand
C) when the government restricts entry through licensing
D) when patents provide protection of intellectual property

Question

Quizplus · Accepted Answer

A natural monopoly is likely to arise when economies of scale exist over the relevant range of demand. This means that as a firm produces more output, its average costs decrease. Because of this, it becomes more efficient to have one firm produce the entire output of a market rather than multiple firms with smaller outputs. This creates a barrier for new firms to enter the market and compete with the established firm, leading to a natural monopoly.

When Is a Natural Monopoly Likely to Arise